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IMF urges EU to be less protectionist

Our Bureau

NEW DELHI, July 2

THE International Monetary Fund (IMF) has urged the 15-member European Union (EU) to make better progress in liberalising its highly protected sectors such as agriculture, processed foods, textiles and clothing for the benefit of the developing countries .

This gesture would provide significant benefits to the EU while enhancing the trade and growth prospects of developing countries, the Fund said in its recent Mission concluding statement on the Economic Policies of the Euro Area as part of is 2001 Articl e IV consultation discussion with the Euro-Area Countries.

The Fund singled out agriculture as deserving "particular attention" since high broader protection and producer subsidies under the Common Agricultural Policy (CAP) continue to impose significant costs on trade partners by depressing world market prices and pre-empting markets. "Comprehensive reform of the CAP is needed to support the liberalisation of agriculture and prepare for EU enlargement," it noted.

IMF noted that after the welcome adoption of the "Everything-but-Arms" initiative for the world's least developed countries, the EU also recently took steps to simplify its General System of Preferences and to restore preference margins. It has continued to expand its network of reciprocal free trade agreements with developing countries.

While these initiatives could improve market access for eligible countries, the Fund cautioned that they need to be "complemented by multilateral liberalisation to reduce trade diversion and improve the allocation of resources within the EU through incre ased international competition.''

Given the prominent role of the EU in the multilateral trading system, IMF said it welcomes the "high priority" the EU is giving to reaching agreement on the scope of a new round in the run-up to the WTO Ministerial in Doha. A new round would help contai n protectionist pressures and provide a needed boost to global growth.

Stating that the general sentiment towards a round seems to have improved, the Fund noted that substantive differences in the positions of key players still seem to be "unresolved" which call for "leadership and flexibility" on the part of EU to achievin g a consensus.

Turing to the Euro Area's fiscal policy, the challenge now is to safeguard the credibility of the Stability and Growth Pact (SGP) while tailoring its implementation to the requirements of a well-functioning monetary union.

This calls for sustaining medium-term budgetary consolidation without resorting to pro- cyclical policies that risk prolonging the downturn. But past experience is not encouraging in this regard as countries have typically opted to smooth fiscal balances rather than the economic cycle, delaying in the process much-needed underlying fiscal adjustment.

Buffeted by adverse shocks, the euro-area economy has weakened appreciably and growth projections are gravitating towards 2 per cent for this year. Nonetheless, absent further shocks and presuming continued wage moderation, IMF expects the situation to i mprove over the next twelve months, gradually but surely on inflation and more haltingly on growth.

In this setting, structural policies need to be reinvigorated and oriented toward strengthening employment creation, notably by sticking to agreed or implied expenditure plans, while accepting the operation of automatic stabilisers on the revenue side, t he Fund said.